You probably know that VA loans help veterans and their families become homeowners. One way VA loans do this is by making the purchase of existing homes more affordable. Veterans can buy a house with a 0% down payment. And interest rates are typically lower compared to other types of loans.
Veterans can also use VA loans to finance the construction of a new home. Getting a loan to build a home is a more complex process than getting a mortgage to buy one. The VA has construction requirements and inspections. The terms of the loan are often not as generous. Veterans must live in the houses they build with the loan. And not all lenders who offer loans to buy a house also offer loans to build one. This includes Freedom Mortgage. We do not currently offer one-time VA construction loans.
Requirements for a VA construction loan
Just like when you want to buy a house with a VA loan, you’ll want to make sure you meet the eligibility requirements before you get started. These are ...
- A Certificate of Eligibility (COE) that proves you have served in the military, are on active duty or are an eligible spouse.
- A debt-to-income (DTI) ratio of 41% or lower. Some lenders may be flexible on your DTI.
- A good credit score of 620 or higher although some lenders may approve the loan with a lower credit score.
How the VA construction loan process works
Once you know you are eligible, follow these steps to get your VA construction loan. The process of building a home is more complex than buying one, as you might expect.
- Find a lender. Research banks and mortgage companies to find ones that offer loans for construction. Fewer lenders are willing to fund these kinds of VA loans. Freedom Mortgage does not offer VA construction loans.
- Get pre-approved. Estimating the cost of building a new home can be complicated, and the costs can change during construction. Knowing how much money you can borrow is important.
- Choose a licensed, insured, and VA approved builder. Your builder must be registered with the Veterans Administration and they must be willing to follow the requirements and approvals the loan requires.
- Own the land. You’ll need a place to build the house. It is possible to purchase land with a VA construction loan. You will need to do it as part of your building plan, however.
- Submit a construction plan and a complete set of blueprints. These are required to get your loan approved. Lenders will not agree to the loan without them.
- Be prepared to wait. VA construction loans frequently need 45 to 60 days or longer to process. This is longer than the time a typical mortgage usually takes.
- Pay the closing costs and close the loan.
- Construction begins. Congratulations! You are on your way to a new home.
Please note that Freedom Mortgage does not offer one time construction loans on any product, including VA. Freedom Mortgage would require the construction be 100% complete in order to approve the loan.
One-time closes with VA construction loans
Building a home can require people to get two loans. First they get a building loan to pay for construction of the house. These loans tend to be short term (one year is usually the maximum) with variable interest rates. Once construction is finished, they refinance the building loan and replace it with a traditional mortgage. When people get two loans, they need to complete two applications and pay two sets of closing costs. This is often called a "two-time close.”
VA construction loans allow veterans and their families to combine the building loan and the mortgage that refinances it into a single transaction. The permanent financing is established prior to construction, and the final terms are modified to the permanent term at the conclusion of construction.
Who can build a home with a VA construction loan?
The construction must be done by a VA-approved builder who is registered in the VA system. The builder must be licensed and insured and be willing to submit documentation to become a VA builder. Many lenders do not allow veterans to do the construction themselves. If a lender does allow veterans to build their own homes, they are likely to require documentation that shows how the funds were spent.
Pros and cons of a VA construction loan
While VA loans are a helpful benefit for veterans to achieve their dream of homeownership, VA construction loans have their pros and cons.
Pros of a VA construction loan
- You can take out one loan to pay for construction costs and the mortgage.
- You can take advantage of the 0% down payment for the mortgage that is offered with the VA program.
- No Private Mortgage Insurance (PMI)
Cons of a VA construction loan
- It can take a while to process the loan, potentially up to 60 days.
- It may be challenging to find a builder or lender who will work with you on a VA construction loan.
- While there is no PMI, you still have to pay the VA funding fee.
While a VA construction loan has more challenges than a traditional mortgage, it could be worth the extra effort to build your dream home. Freedom Mortgage does not currently offer one-time VA construction loans. We do offer traditional mortgages through the VA. However. construction of the home needs to be 100% complete before we will close these loans.